Back in January, investor optimism soared as headlines touted great success for both US and Canadian markets. We were told Canada’s main stock market index, the S&P/TSX composite index, was expected to shatter records this year, as the market was hitting record highs.
Two months later, in March, we are now dominated with headlines of the worst day in history for the TSX, and that the market is back to where it was in 2016. That level of extreme volatility can prove challenging for even the most seasoned investors.
What’s Going On?
There are two key events that appear to be driving the commotion in financial markets – the coronavirus (COVID-19), and the instability in oil prices.
With COVID-19, the first cases of severe pneumonia were reported in China on December 31st, 2019. By January 7th the virus had already been identified. About a month later, on February 4th, President Trump talked about coronavirus in his State of the Union address. But US politics was still engrossed in the impeachment trial at this time, and the markets were hitting new all-time highs. However, over the following weeks, as more and more cases of the coronavirus sprung up around the world, and as coverage of the virus began to dominate the news cycle, stock markets around the world have experienced tremendous volatility.
Although the virus is the major story dominating news headlines, the dispute between Saudi Arabia, which is the largest participant in OPEC, and Russia, has also had a very significant impact on stock market volatility. On Monday, March 9th, the price of oil plummeted over 30%, which was the worst drop since the Gulf War of 1991. In turn, financial markets plunged.
What Should You Do?
In terms of health advice and staying safe, we defer to the Government of Canada’s website Coronavirus disease (COVID-19): Being prepared, which has information on symptoms on treatment, awareness resources, travel advice, and more.
In the meantime, we’ll focus our advice to the realm of finance and investing. In regards to the coronavirus and its impact on your investment portfolio, what should you do about it? Or, more importantly, what can you do about it? The short answer is, of course, nothing.
To be a successful investor, one of the most important things you must be able to do, is prevent yourself from making hasty and emotional investment decisions in volatile markets. As Warren Buffett famously said:
“To invest successfully does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding the framework.”
Of course, we are all human, and so it’s normal and natural to except that we feel those emotions. The key is not letting those feelings translate into investment decisions. Or, as Buffet puts it, we must not let our emotions corrode our investment decisions. But that’s easier said than done. How we can stop ourselves from making knee-jerk reactions and abandoning our investment portfolios at times like this?
Tips For Keeping Your Cool
Ask yourself, have your goals changed since last month? Has your investment timeframe changed? If those things haven’t changed, then why should your investment portfolio change?
The answer is, of course: it shouldn’t. If your investment goals and timeframe haven’t changed, then your investment portfolio shouldn’t change either. Think of it this way: If your investment portfolio is appropriate for your investment goals and circumstances, changing it would therefore mean it’s no longer appropriate, and no longer properly aligned with your needs.
However, what many investors in these situations tell themselves, is something fuzzy like “I’m just going to get out of the market until this thing straightens itself out, then I’ll get back in.” That may sound pretty good on the surface, but how will you know when the situation has straightened itself out? How much will the markets rebound before you finally admit to yourself that it’s safe to get back in? And most importantly, how much of the gain will you have missed by the time you get back in? Sadly, for many investors, this turns out to be a losing strategy.
Stay Invested, Stay Calm
Is it possible to avoid the current volatility we’re experiencing in the financial markets? Of course it is. You could avoid the volatility of the stock market altogether by investing in products such as GICs. However, while you’d be insulated from market volatility, you’d also be insulated from earning any kind of meaningful rate of return on your investments as well.
That brings us to the crux of the matter. If you want the growth potential of stocks, you have to be willing to accept the volatility of stocks. They are two sides of the same coin. And we shouldn’t allow ourselves to subscribe to the fiction that we can somehow get rid of market volatility and yet still enjoy great market returns. As much as we want higher returns with lower volatility, the reality is that it’s a packaged deal, and you can’t have one without the other.
If you want to participate in all the market ups, you have to be willing to sit through the downs. That’s really the only guaranteed way to capture every single upswing in the markets – stay invested all the time. That may sound simple, but of course, it’s much easier said than done, because it means sitting through hefty declines from time to time, just like the one we’re experiencing right now.
If you’re feeling anxious about your investments due to the recent volatility in the stock market, just remember that your portfolio is designed by a CFA Charterholder, and is properly adjusted based on your goals, risk tolerance, and time horizon. Furthermore, if the recent market volatility has caused any portion your portfolio to stray from its target weighting, rest assured it will be re-balanced back to the proper allocation.
Volatility, even extreme volatility like we’re experiencing right now, is a normal part of stock market investing. Stay on track, and avoid tinkering with your plan or investment portfolio, no matter how strong the temptation. Managing your own behaviour during challenging times is truly one of the most important trademarks of a great investor.